Revenue-gathering restrictions imposed on The History Museum of Hood River County since early September will remain in place following the recent release of a report that found museum board members “appeared to intentionally circumvent” county-established financial controls when handling museum funds.

After reviewing the report, Hood River County Board of Commissioners made a unanimous vote during its regular meeting Oct. 21 to continue disallowing the handling of money at the museum, which means no collection of admission or membership fees and no sales at the museum gift shop. It also means donations cannot be directly accepted by the museum.

The report, compiled by Tigard accounting firm Pauly, Rogers and Co., is the result of an August investigation that was launched by the county after learning of possible “administrative and operational anomalies,” occurring with the museum’s accounting practices, according to County Administrator Dave Meriwether. The facility was closed for nearly a month while independent accountants hired by the county examined the museum’s financial records.

According to the report, the county-appointed museum board members violated county policies when they set up a bank account, a PayPal account, and a credit card account for the museum from May 2012 to May 2013 without receiving or seeking required county approval. The county has since ordered these accounts closed.

The report also stated that museum board members erred when they used the county’s Employee Identification Number without permission to set up the bank and PayPal accounts. The bank account, opened at CenterPointe Bank, is also “not a qualified depository for public funds per ORS 295.002” according to the report. Accountants also found fault with the museum’s purchase of a point-of-sale system in Feb. 2013 after being directed by the county’s finance department not to do so.

Also a point of concern was the “sloppy” condition of the museum board’s books and records.

“All of the transactions were handwritten in a checking account book and double entry accounting is not used,” the report read. “Many receipts were handwritten on scratch paper without good documentation as to what items consist of.”

According to a separate report prepared by county counsel on the issue, the county did not provide the museum with a credit card reader system until the “last quarter of 2012.” In a letter responding to the reports on behalf of the museum board, board member Mary Ellen Barilotti explained that the bank, PayPal, and credit card accounts were set up “to provide the public with a seamless and efficient way to donate and pay for museum events.” She acknowledged that the museum board “agrees that better record keeping procedures could have been followed,” but that any fiscal transgressions were “done without any intent to deceive, mislead or violate County budget procedures.”

The Polly, Rogers and Co. report conceded that the museum board never “made any inappropriate expenditures,” but added that “a great number of these expenditures were clearly unauthorized” and that the board “appeared to intentionally circumvent not only the internal financial controls established by the County but also statutory restrictions on the use of the public funds.”

Barilotti said that though the county may not have been aware of every expenditure, only “legitimate museum expenses” were paid through the CenterPointe account.

“Within the context of overall Advisory Board activities over the last several years the Board hopes and trusts that the public will recognize that it conducted itself ethically and diligently in its fundraising activities with every penny of donated funds spent toward providing the public with a museum it can be proud of,” she said in her letter.

County counsel, however, maintained in its own report on the museum investigation that “while no Advisory Board member (or other museum volunteer) converted County funds to personal use, it is not accurate to state categorically that no criminal laws were violated.”

The report stated that the “unauthorized use of an EIN alone is a violation of federal law” and “it is possible the use of the EIN to open the bank account could have amounted to the crime of identity theft.” Counsel criticized the PayPal account for creating “significant additional risks to the County over and above those posed by a traditional point-of-sale system,” because the funds from museum receipts or donations deposited into the account “could easily have been diverted” and “were not tracked by CenterPointe.” The report did note, however, that “the only meaningful control was the integrity of the individual museum volunteers.”

Counsel added that the unauthorized accounts made it difficult for the county to track tax-deductible donations to the museum and send acknowledgement letters to donors, which are used to file tax returns. It was reported that “unfortunately, the Finance Department was unaware of the donations received in 2012; therefore, they must now identify and notify each individual donor.”

Barilotti countered that “IRS charitable acknowledgements were routinely sent to donors,” and defended the board’s use of the POS system, saying “procedures were put in place to efficiently and effectively keep track of County money” with the system.

The nature of the investigation has created an awkward situation between the museum and the county, at a time when the two entities are working to coordinate the transition of the museum to a 501(c)(3) federal nonprofit — a tax designation the museum applied for shortly before the investigation began — which will allow the museum board to have greater control over its finances.

Board members have attended county commission meetings to publicly criticize the county’s handling of the investigation. In her letter, Barilotti chided the county for not raising its concerns with the advisory board before shuttering the museum.

“Rather than closing the museum, emptying the gift shop, ordering the Advisory Board to refrain from accepting admission fees or donations, and commissioning and funding two separate investigations, it might have been in everyone’s interest to meet together to address and resolve the County’s concerns,” she said. “The Advisory Board was essentially left ‘out of the loop’ since early August 2013. The Advisory Board would certainly have followed the guidelines expressly set forth by the County at any such meeting and freely cooperate.”

Because no admission or membership fees are getting collected, nor sales made at the gift shop, county revenue forecasts for the museum are in danger of not being met. Restrictions are to remain on the museum until it is awarded its 501(c)(3) designation — a process Meriwether said could “take up to a year” due to the backlog created by the federal government shutdown that occurred during the first half of October.

Although monies from the county’s general fund are the primary economic drivers for the museum’s day-to-day operations, the museum’s educational and community programs, collection management fees, and a living stipend for its AmeriCorps volunteer are significantly supported by the collection of membership fees and gift shop sales, according to Museum Director Connie Nice, who did not wish to comment on the content of the reports. She said she had “some concerns” about how those revenues would be supplemented and noted that she was looking for alternate revenue sources while complying with county fiscal controls.

According to Sandi Borowy, director of the county’s budget and finance department, gift shop sales and membership fees were projected to generate a total of $8,000 this fiscal year, but had only generated $4,200 as of Oct. 31. Nice also mentioned she has to re-evaluate the museum’s membership plan, considering that two of the perks provided to members — free admission and discounts at the gift shop — no longer apply.

When asked if it was worth the $2,000 to $3,000 that was spent on the Pauly, Rogers and Co. investigation of the museum, Meriwether responded: “Absolutely. There were questions about the disposition of public funds and we needed them answered.” He added that the restrictions at the museum would remain due to the need for “assurances.”

Barilotti did not agree and said in her letter that the new arrangement was destructive toward both parties.